What the Eurozone crisis means for contractor pensions
Following on from Contractor Money’s earlier guide for CUK readers on What the Eurozone crisis means for mortgages, the second in the series looks at contractor pensions. The current turmoil in the Eurozone is having a knock on effect on contractors too as their stock market based investments suffer extreme volatility and UK gilts yields plummet to historic lows.
One man’s pain is another man’s gain
Those unfortunate enough to be buying a pension annuity face a double whammy as the value of the investments that were earmarked to buy this income for life are at low values at a time when the amount of money needed to produce that income has gone up due to the low interest rates. Annuity rates are linked to the yield on UK Government gilts which, thanks to turmoil in the Eurozone, are at historically very low levels on account of the UK’s safe haven status. Increasingly we are recommending that clients avoid the annuity route to pension income altogether.
The current depressed state of the stock market is therefore bad news for those savers who need access to their investments or are coming up to retirement but paradoxically it could be very good news if you are in your 30s, 40s and 50s and looking to build up a nest egg. Whereas those close to buying a pension annuity have seen projected income rates plummet, if you are still accumulating pension assets you are potentially buying your investment at reduced prices. Buying cheaply now means that over the long term you should see a very healthy return on your investments as long as you can ride out short term volatility to reap the rewards of a future recovery in asset prices.
Exploit the market
To exploit Euro-zone related turmoil in the markets we repeat our mantra of drip feeding investments rather than investing via a lump sum as this exploits day to day fluctuations in asset prices via what’s known as pound cost averaging. This, combined with proper asset allocation which will ensure that you have exposure to property, bonds and gilts as well as equities, should reduce the risk and mean that there are long term profits to be made by UK contractors out of the current volatility.
Doing it for the kids
Even for those contractors who are caught in the current annuity trap there is a potential solution in the form of ‘Income Drawdown’ which allows you to remain invested in the markets to exploit any medium term recovery, yet skim off an income from your pension pot with which to enjoy earlier retirement. Thanks to changes last year, investors need now never buy an annuity, whereas previously it was compulsory by age 75.
This change now even allows intergenerational investment planning as the retired can leave part of their pension to their children or grandchildren whereas in the past, any residual value left within a traditional annuity would have been lost to the insurance company.
Tony Harris is MD of ContractorMoney, the specialist Independent Financial Advisers for Contractors.